Transcription
In this video, we're going to talk about how to put together a Consolidated balance sheet when you have a non-controlling interest. So, if you acquire more than 50% of a corporation but less than 100%, you're going to be required to consolidate that subsidiary. Right? So you're going to account for it as if the purchaser and the target corporation are one entire entity, all together.
However, there's a little bit of an issue when you acquire less than 100% because you're getting all the target's assets and liabilities. They're all coming over to your corporation as the purchaser. However, you own less than 100% of that target corporation. So, we're going to create this account, and it's a stockholders' equity account called non-controlling interest to basically signify that, hey, there are other shareholders that have claims against the net assets of that subsidiary.
So, for example, if you acquire 70% of a target company, let's call it Company C, you acquire 70% of C. Well, you are going to get 100% of C's assets and 100% of C's liabilities. But there's still some other shareholder that has a claim of 30% against those net assets. And so that's the non-controlling interest. It was formerly called minority interest, okay?
So, we're still going to do with a Consolidated balance sheet. We're still going to do these steps where we got these adjusting and eliminating entries that we talked about in the previous video, uh, where we're basically going to, when you make the investment, you're going to create, or when you purchase this subsidiary, you're going to, you're going to debit investment in subsidiary and so forth. So, we have to first eliminate the parent's investment in the subsidiary. We're also going to eliminate that target corporation, that subsidiary. We're going to eliminate their stockholders' equity accounts like common stock and retained earnings. We're going to step up their assets to fair value. That's the target corporation being acquired. And we're still going to recognize goodwill. So, we still have the same first four steps if we're acquiring less than 100% but more than 50%. However, there's a new fifth step where we're going to recognize that stockholders' equity account, non-controlling interest.
Okay, let me show you with an actual example, and it'll make it a little bit easier for you to understand. So, let's say that you're, you're the purchasing corporation. So, purchaser pays $3,600,000 to acquire 90% of another corporation, which we'll just call Target. Okay? So, purchaser is buying 90% of Target. Now, because you're buying more than 50% of Target, you're going to be required to consolidate Target. That means that all of Target's, their, their assets and liabilities are going to become your assets and liabilities, right? So, we've got two pre-acquisition balance sheets here. So, these are the pre-acquisition balance sheets for the purchaser and the Target. And you see that, uh, for example, Target has $125,000 of liabilities. Well, we're going to put these balance sheets together for one entity. We're not just going to add all the accounts. And you, you'll see it's similar to a 100% acquisition in that regard. But this $125,000 liabilities for the Target is going to be added to the purchaser's liabilities. So, we're going to have 100% of those, right? But we're seeing here that we've only acquired 90% of the Target.
So, to figure out the goodwill, we have to figure out what's called the implied purchase price or the implied value of the Target. And so, what we're going to do is that we're going to say, look, 90% or let's say, so 90 over 100, you know, that's 0.9 or 90%, right? That is equal to $3,600,000 divided by X, right? So, we're trying to find X to say, well, what is the implied value if we pay $3,600,000 for 90% of Target, what does that imply that the value of Target is? Okay? So, we just set up these, these equations here, and we can use the algebra. So, now we've got, we've got 90 * X, 90 * X, right? And then we, and then we take $3,600,000 * 100, and then we divide that by 90. Okay? So, so let me just put it here. So, we'd have 90X = 100 * $3,600,000. And I'm just, I'm just going to tell you to save time, X is $3,400,000. $3,400,000. That is the implied value of the Target. Why did we bother to do that? Well, to calculate the goodwill, we're still going to, we're going to need to know this implied value, okay? That we're, we're trying, when we're thinking about the purchase price minus the, the net identifiable assets of the Target, we're going to be using this implied value, not the actual cash that the purchaser paid, which was $3,600,000.
Okay, so first, we need to know. So, we've got the pre-acquisition balance sheets. And then we've got to know that what is there any step-up of the Target's fixed assets or current assets? Well, we see that the net fixed assets, the fair value is actually $2,625,000. That's $1 million higher than the Target's book value of its net fixed assets, okay? So, we're going to have $1 million. We're going to have $1 million of step-up. We're going to have to step up to fair value. Now, the fair value of the Target's net identifiable assets is $3 million. How did I get that? Well, it's $500,000 of current assets, $2,625,000 of fair value of the net fixed assets, minus the $125,000 of the liabilities. So, this is fair value, Target's net identifiable assets. Why do we care about that? Because we're going to take that implied value, which was $3,400,000, and we're going to subtract the net assets, the net identifiable assets, and that's going to give us $400,000. That's the amount of goodwill that we're going to recognize. And remember, goodwill is an asset. It doesn't show up in the pre-acquisition balance sheets here. We're saying neither of these companies had any goodwill coming in. So, you're going to see it on the Consolidated balance sheet.
Okay, so I want to show you now the adjusting and eliminating entries that we're going to have to make to put together this, this Consolidated balance sheet. Uh, but first, note that when we, when we originally as the purchaser acquired the Target, we're going to debit investment in Target and, and then we're going to credit cash. I'm assuming we paid cash here for $3,600,000. Now, we're going to have to get rid of that investment in Target. I know it sounds silly, we create this account and then we get rid of it when we do the consolidation, but that's how it works. So, we're going to have to credit it to get rid of it. Okay? So, we're going to credit first. What we're going to do is we're going to deal because we also have to get rid of the, the Target's equity. Okay? So, the Target had $1,500,000 of common stock and $500,000 of retained earnings. So, we're going to debit both of those first. And then we're going to credit investment in Target for the corresponding amount. But you see now, we had investment at Target was $3,600,000, and now we just debited it for $2,000,000. So, it's not at zero. We got to get it to zero, right? We need a, we're going to need another credit of $1,600,000. How are we going to get that credit? Well, remember we've got some step-up with that fair value of, of the fixed assets. It was $1 million. The fair value is higher than the book value by $1 million. So, we debit the fixed assets to recognize that. And then, remember we had the goodwill. So, we debit the goodwill for $400,000. So, that's $1,400,000 in debits. And then we credit the investment in Target for the $1,600,000 to get the investment in Target to be zero. But then we have this amount here. If you didn't know what this was, you could figure out that just to make it balance, it has to be $340,000. Uh, with, with the non-controlling interest. This is going to be a stockholders' equity account. So, this is stockholders' equity, non-controlling interest. And if you're thinking, well, how does it make sense? Instead of figuring out as a plug, how can we think about this? Well, you could think about it like this. So, the implied value of the firm, that the, the target corporation, not the entire corporation. So, the, the $3,400,000, remember we calculated that. The implied value. So, the implied value is $3,400,000, okay? So, if we multiply that by 10%, and why 10%? Well, there's 100% is the entire company, but the purchaser bought 90%. So, what does that leave for the minority shareholder or the non-controlling shareholder? They have 10%. Okay? So, 10% claim against $3,400,000 value of the Target would be $340,000. Okay? So, you can think about it as this non-controlling interest here, that is the non-controlling shareholder's claim against the net assets of that subsidiary, of that Target. Okay? I hope that makes sense. It's a stockholders' equity account, and we're just recognizing that.
Okay, now we can put together the Consolidated balance sheet now that we've made all those adjusting entries. Okay? So, what I'm going to show you. So, we've got the Target and we've got the Purchaser. Now, we've got, we got to notice that now the purchaser, their current assets is only $690,000, whereas before it was $3,750,000. Why? Because they paid for, they paid the Target shareholders, right? They paid the Target. They didn't get all of them. They only got 90%. But they did pay. So, they paid $3,600,000. That was the cash paid. So, that was the, that was the cash paid. So, that's gone. The purchaser, the purchasing company, no longer has that. So, that cash is gone. And so that's why it's $690,000 instead of $3,750,000. But then we add these two together, and we get $1,190,000 for current assets on the Consolidated balance sheet. This is the column you want to care about. This is the one that is going to go. This is what we're putting together. This is the entire goal is this Consolidated balance sheet. I've just got the adjusting entries here, the debits and credits, you can see that. And then also the, the pre-acquisition but post-cash being paid, okay? So, or, um, not pre-acquisition, I should say, because we, we paid the cash here $3,600,000. I'm just saying before we put together a Consolidated balance sheet. So, pre-consolidation, I should say, here are the, the balance sheet sheets. Okay? So, now we go and we say, all right, well, fixed assets, what's that going to be? Well, we had the book values of these fixed assets plus the $1 million of step-up. $7,625,000. Investment in Target. Well, we zeroed that out. So, that's zero. And we had the goodwill of $400,000. That gives us total assets of $9,215,000. Now, the liabilities, again, we just took these liabilities here, we took them there, and we said, okay, we got $375,000 liabilities. Now, we had to get rid of the Target's common stock. That's why we make this debit. And we also get rid of their retained earnings. We get rid of their equity accounts. But we still have the equity account from the purchaser. So, we have $7 million in common stock, $500,000 in paid-in capital, $1 million in retained earnings. But then, don't forget, at the very end, we've got this $340,000 non-controlling interest account that we, that we created before here. So, that's a stockholders' equity account. And that represents that person who still owns, or those people who still own 10% of Target Corporation. We've, remember, we've taken with this Consolidated balance sheet, we've said, hey, we've got all their assets. We've got, or see, we've got the five, uh, 5 million plus the $1 million of step-up. Oh, that's a purchaser. Uh, here, the $1.625 million and the $1 million of step-up and the $500,000 of current assets of the Target. We took all of that, right? All of that ended up on the Consolidated balance sheet. But there's still some shareholders who own 10% of the Target. And so, we've created this non-controlling interest account to recognize the fact that they have a claim against the net assets of the Target Corporation.